Time for an important lesson with someone else picking up the tuition costs:

It is the Meredith Whitney story, and it is instructive to those of us who work in finance and occasionally engage the media. Any of you who might think an outrageous call is the way to achieve lasting fame and fortune on Wall Street, Ms. Whitney’s story might be an instructive tale of warning.

After a good (but far from unique) downgrade on Citigroup in 2007, Ms. Whitney found herself thrust into the spotlight. The former Oppenheimer analyst launched the Meredith Whitney Advisory Group two years later, with a full staff and 30 top tier blue chip clients. Less than 5 years later, she has lost half her client base, is down to 1 full time employee, and won’t comment to Greg Zuckerman of the WSJ in a story that is about her.

I don’t want to pile on — at this point, it would just be cruel — but it might be instructive to see where things went amiss. Anytime we have an opportunity to learn from someone elses mistakes, it is incumbent upon us to do so.

What can we learn from Ms. Whitney story? I see five lessons that I would take from her unfortunate experiences:

1. Leveraging a call into a new business is challenging: History is replete with examples of one hit wonders who never turned out any thing beyond that pop song. There are too many to list here in music (Wikipedia arranges them by decade).

In finance, some of the names who made a great call, but then failed to follow that are well known. The poster child is Elaine Garzarelli who improbably called the 1987 crash*, only to never repeat that feat or anything like it. Others might put Nouriel Roubini in that camp, but he has created a firm that seems to operational, and regardless seems to have a career otherwise. And who was that copycat analyst who forecast QCOM running to $2000? He tried to take a page from Henry Blodget’s playbook of calling Amazon to $400 — and failed.

2. Media buzz is not a business model: Regardless, these outrageous calls (right or wrong) are not what the VCs would describe as “a sustainable business model.” It generates some buzz, some attention, some media headlines. But the attention span of the American public (and therefor the media) is notoriously short. It’s like a drug with a fast developing tolerance. If you want to stay in the spotlight, you have to take bigger and bigger doses, which in media terms translates into more and more outrageousness. That increases the odds that you will eventually blow up spectacularly.

3. Stick to what you do best: Whitney was a bank analyst, and she (somehow) believed that qualified her to discuss municipal bond finances. Her December 19 2010 call on 60 Minutes — predicting “hundreds of billions of dollars” of municipal defaults within 12 months — failed to pan out. Instead, defaults fell. Bt she rocked the muni bond market, caused headlines for months — even as the prediction was falling flat on its face. She was apparently operating outside of her comfort zone, in a huge market she had little expertise in.

The response was not swift but it was savage: Professionals questioned her analysis as well as her motives. (In our ThinkTank, David Kotok repeatedly called her out on her sloppy, sensationalistic non-analyses). Well established muni bond players were deeply offended by her blase disruption of a serious market. She failed to consider that Munis pay for things like roads, and bridges and hospitals and schools.

Perhaps a corrollary lesson is “Be wary who you piss off .”

4. Make sure your firm is filled with happy workers: Some of her former staff’s comments in the WSJ article are catty. They complain about her work habits; They note she often is “working” from Bermuda where she owns a home on a resort. These sorts of reveals usually come from an angry and underpaid staff.

The people who work for you are the ones who make you look good. If you don’t treat the right, don’t be surprised if they respond in kind (karma is a bitch).

5. Add value to your clients: But the bottom line is her $100,000 annual fee simply did not pay for itself. Not only is that on the high end — more than double what shops like Ned Davis Research charges — it did not seem to create much in the way of actionable or value added work product.

Pricey, seemingly useless research is not what the Street needs more of . . .

Developing a sustainable, scalable finance model that adds value to clients should be job one for all new finance start ups.

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

10 Responses to “Forecasting the Future is Hard; Forecasting Markets is Even Harder”

It’s indeed a dismal record (of predictions). But I continue to think that Whitney is right. Municipalities are going to default on a massive scale. And surprisingly “Obamacare” has – for the time being – saved the muni bond market for while.

Mark Twain: “History doesn’t repeat itself, it rhymes”.

People who look at events that happened in the past have a good clue of what’s going to happen in future. But the timing is always extremely tricky.

Great traders have great skills. It is not for everyone. In all professions there are those that are exceptional usually backed by extra-ordinary hardwork, talent and experience.
Highly skilled traders rely on forecasts to make bets. Forecasting therefore ( though pretty hard) is an essential tool of great traders. This is true because you must know where you are coming from and where where you are going to. Forecasts also help to deploy the most importnat aspect of trading which is money/position management.

On Meredith I dont think there is any reason to castigate her. Anyone can make a wrong call. What is important is not to .be open ended about it or extremely opinionated. There must be downside and upside to any forecast since it is probabilistic. You must accept being wrong if your line in the sand is overwhelmed. Meredith may not have been bold enough to notice to realise that she was wrong early enough. Or to put it another way..that she is too early to that call. I think her call is gradually coming to pass as rate rise keep increasing.

In terms of her staff and all…that. I dont think those matters at all. Humans are ficle minded and inpatient. They always want to identify with who is winning currently thereby jumping from pillar to post and end up losing money in the end.

Whitney is absolutely right. Municipalities are going to default. But predicting when is the hardest part. I presume she overlooked the fact that “Obamacare” has – for the time being – saved the muni’s bacon. Investors noticed that interest paid by munis are 1) “Obamacare” tax exempt and 2) tax deductable.
See what happened to the ETF called “MUB” since early 2009.

So, investors flocked to munis. And it allowed municipalities to live “beyond their means” (again). And that’s an excellent reason to tax munis at the same rates as other bonds.

Forecasting the future isn’t too hard. What one needs is good understanding of how the economy and markets work. And have a good economic model. And what financial indicators matter and which don’t. Then the future is (comparatively) easy to forecast. Anyone who compares the current economic situation with e.g. the (early) 1970s or the 1960s is fooling him/her-self.

But other than that, I agree. She simply got “too big for her bridges” and tried to build her own research firm on her newly gained fame.

Question: Was she fired from Oppenheimer & co. ?

“She failed to consider that Munis pay for things like roads, and bridges and hospitals and schools.” I completely fail to see what’s the connection between that and her predictions.

“She failed to consider that Munis pay for things like roads, and bridges and hospitals and schools.”

Mr. Ritholtz:
- In the early 1930s municipalities went bankrupt in droves.
- From the year 2000 total up to say 2008 the amount of municipal debt DOUBLED !!!! Municipalities DOUBLED their debtload in a mere 8 years !!!! And YOU are surprised that Whitney predicts “a deluge of bankruptcies” ?
Sources: “The GREAT crisis ahead”, Harry Dent, Gary Shilling, Robert Prechter.

Say Hello

About Barry Ritholtz

Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

Quote of the Day

"The largest Asian central banks have gone on record that they are curbing their purchases of US debt. And they are also diversifying their huge reserves, steadily moving away from the dollar. The risks have simply become too many and too serious." -W. Joseph StroupeEditor, Global Events

Sign Up For My Newsletter

Get subscriber only insights and news delivered by Barry every two weeks.